A new sheriff in town

More than 50,000 Upstate New York families are in danger of losing their homes because unscrupulous lenders sold them “liar loans” offering low mortgage payments that quickly swelled to as much as four times the original cost, Sen. Chuck Schumer said Wednesday.

Nearly 9,000 families in the Rochester-Finger Lakes region and nearly 4,000 in the Southern Tier are at risk of foreclosure because of unregulated subprime loans offered by rogue mortgage brokers not affiliated with traditional banks or lending institutions, the New York Democrat said. Nearly 6,000 families could face foreclosure in Monroe County alone, Schumer said.
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Schumer, who serves on the Senate banking committee, is offering legislation to regulate all mortgage brokers, outlaw “liar loans” in which borrowers are not properly informed of escalating payments, and create a New York task force to try to help affected homeowners restructure their loans and keep their houses.

“The subprime market is the Wild West of mortgage loans and it’s time we bring a sheriff into town,” Schumer said. “The first step is making sure that borrowers are protected from these usurious lenders. It’s long past time that we ensure that working people are protected from loans that promise them the world and instead give them a mountain of debt and leave them homeless.”
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“What I have seen of late troubles me deeply,” said John Robbins, chairman of the Mortgage Bankers Association in testimony this week before the House banking committee.

“Responsible lenders only extend credit to borrowers who are willing and able to make mortgage payments,” he said. “They do not trick borrowers into loans that are unsustainable. And they do not hold out something that is only a mirage of the American dream. Yet bad loans were made. They were not made responsibly or with the best interest of consumers in mind.”

New York Sen. Hillary Rodham Clinton, the current front-runner for the Democratic presidential nomination, recently called the subprime mortgage loan market “broken” and called for the Federal Housing Administration to issue more mortgages at lower rates to working-class families.

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Losses on U.S. mortgage bonds issued in 2006 against subprime loans could be as high as 8%, the highest forecast in recent memory, an executive said on Thursday.

Roelof Slump, a U.S.-based managing director for the ratings agency, told a conference in Singapore this means mortgage bonds with below-investment grade ratings could be downgraded and even risked default as troubles build up in the subprime housing market. Subprime loans are issued to less creditworthy borrowers.

“2006 may prove to be the worst subprime vintage ever,” Slump said, adding that he expects losses of between 6% and 8% in the value of these bonds.

Fitch’s loss forecast is slightly higher than Standard & Poor’s, which said earlier this week losses on 2006 subprime mortgage bonds could be as high as 7.8%.

Slump said bonds issued against subprime loans account for 15% of the total $2 trillion worth of mortgage-bonds issued in the United States.

Even bonds with ratings of BBB minus and BBB — which are the lowest investment-grade bonds — could come under pressure, he said.

Losses from subprime home loans may make Merrill Lynch bonds riskier than debt issued by Bear Stearns, the biggest U.S. underwriter of mortgage bonds, Bank of America analysts said.

Merrill may have the most potential for losses from so-called collateralized debt obligations, or CDOs, that repackage bonds backed by mortgages, analysts led by Jeffrey Rosenberg wrote in a research note this week. “The relative exposure to Merrill is likely understated,” Rosenberg said. Underwriting data “suggest Merrill Lynch has the most exposure of the brokers to subprime through the origination of CDOs,” his team wrote.

A Merrill spokeswoman said they doesn’t comment on analyst reports.

Some CDOs may face “severe” cuts in credit ratings because they hold bonds backed by subprime mortgages, or loans made to people with poor credit scores, Moody’s Investors Service said this week.

Subprime mortgage securities made up about 45 percent of the holdings of CDOs that are backed by assets such as home loans, car loans or other CDOs, a segment known as structured finance, Moody’s Investors Service said.

A significant part of the problem in the subprime market is not simply that too many dollars were put into the hands of working families and people with bad credit. The problem is that too many exploding products–products that were designed from the beginning to become unaffordable–were sold around the country.

This is important because the suggestion that the subprime meltdown is just about a mistake in trying to expand homeownership is simply wrong. No one knows the disaggregated statistics–how many people could have made it with a cleaner product and how many would have failed with any product.